Environmental Influences on MNE Subsidiary Roles: Economic Integration and the Nordic Countries

Environmental Influences on MNE Subsidiary Roles: Economic Integration and the NordicCountriesAuthor(s): G. R. G. Benito, B. Grogaard, R. NarulaSource: Journal of International Business Studies, Vol. 34, No. 5 (Sep., 2003), pp. 443-456Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/3557161Accessed: 19/04/2010 22:41

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Journal of International Business Studies (2003) 34, 443-456 C 2003 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $25.00

www.jibs.net

Environmental influences on MNE subsidiary roles: economic integration and the Nordic

countries

GRG Benito'2, B Grogaard1, R Narula2

1Norwegian School of Management BI, Elias Smiths vei 15, N-1302 Sandvika, Norway; 2Copenhagen Business School, Howitzvej 60, DK-2000 Frederiksberg, Denmark

Correspondence: Professor GRG Benito, Department of Strategy, Norwegian School of Management BI, Elias Smiths vei 15, N-1302 Sandvika, Norway. Tel: + 47 67557000; Fax: +47 67557250; E-mail: [email protected]

Received: 13 July 2001 Revised: 10 January 2003 Accepted: 14 January 2003 Online publication date: 24 July 2003

Abstract We seek to examine the importance of environmental factors in determining MNE subsidiary roles. In particular, we examine the environmental factors associated with 'deep' integration schemes such as the EU. Such schemes

require a convergence of economic structure, due to the establishment of common regional institutions, regulations and policies. Specifically, we

distinguish between the scope of activities performed by subsidiaries, and the level of competence of those subsidiaries. The empirical analysis is based on a large-scale survey of foreign-owned units in Denmark, Finland and Norway. These Nordic countries differ with regard to their EU-membership status -

Norway being the 'outsider', while the others are members - but are very similar to each other in most other respects. Our data show that subsidiaries in

Norway report significantly lower scores for both scope of activities and levels of competence. The effects remain strong even when we are controlling for other potentially influential factors. The findings indicate that being on the 'outside' of the EU may indeed carry the price of becoming less attractive to MNE activity. Journal of International Business Studies (2003) 34, 443-456, doi:10.1057/

palgrave.jibs.8400047

Keywords: subsidiary roles; regional integration; foreign direct investment; Nordic countries

Introduction Strategic management literature on the role, dispersion and development of subsidiaries is now well developed (see, e.g., Bartlett and Ghoshal, 1989; Birkinshaw, 1996; Birkinshaw and Hood, 1998; Holm and Pedersen, 2000; Roth and Morrison, 1992). Nevertheless, it has tended to focus on MNE-specific (i.e., internal) determinants. Little attention has been given to the extent to which a subsidiary's role and competence is determined by environmental (i.e., external) factors (Birkinshaw and Hood, 1998). This article seeks to rectify that oversight by examining the response of MNEs to the external environment as they locate their subsidiaries and assign and develop different subsidiary roles for them. It is the contention of this article that although internal MNE factors play an important role in determining the kinds of activities undertaken by a subsidiary in a given location, environmental factors influence both the initial entry decision and the competence and scope of the affiliate.

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Environmental factors include location advantages issues as well as political economy issues. We do not intend to provide a systematic analysis of all the environmental determinants of subsidiary roles, nor to

argue their importance relative to interal decisions. Instead, we will illustrate that macro factors associated with a subsidiary's location advantages are also

significant in understanding its roles and competences. Our focus here is on the effect of location

advantages associated with 'deep' regional integration schemes such as the EU. The importance of location advantages in determining MNE activity within the EU has largely been studied on an

aggregate level. Considerably less attention has been

paid to the firm-level response1 to changing location

advantages as a result of integration, although it seems axiomatic that changes in economic structure due to integration have significant implications for the way in which MNEs organize their activities. Our interest in regional integration is not so much in the mechanisms of the process per se, but in what

deep integration represents at a company level. One of the mechanisms (and indeed also an outcome) of

deep integration schemes is a convergence of economic structure as a result of the establishment of common regional institutions, regulations and

policies (Narula, 2003). From a European perspective, there is concrete evidence that there are substantial benefits for MNEs operating within the EU compared to those operating outside it.

We seek to examine the importance of environmental factors on the development of subsidiary roles. We illustrate our arguments by focusing on the specific case of three otherwise-similar peripheral European countries - the Nordic countries of Denmark, Finland and Norway - which share a number of common features, but are not all members of the EU. While these three countries are remarkably similar culturally as well as in terms of market size and wealth, they differ in the extent to which their economic and industrial structures have converged as a result of deep integration taking place within the EU. We use data collected in a detailed questionnaire survey of foreign- owned companies in Denmark, Finland and Norway. In all, the database comprises 809 subsidiaries of MNEs from more than 20 countries, established over a number of years: about half of the sample was established before the intensification of European regional integration from the mid-1980s.

The external environment and MNE activity The literature on subsidiary development, evaluat-

ing the dynamics behind the evolution of subsidi-

ary roles, has greatly expanded over the last 20

years, beginning with the seminal work of Bartlett and Ghoshal (1986, 1989). Although they proposed a close link between the influence of the subsidiary and the strategic importance of its local environment, many of their studies on subsidiary roles have approached the issue mainly from an internal

perspective. These roles have commonly been viewed as the result of corporate headquarters assignment or an autonomous process within the

subsidiary. Lorenzoni and Baden-Fuller (1995), for instance, credit the strategic center as having a critical role in a network of units, adding value by contributing its own expertise as well as by coordinating the flow of knowledge within the network. The degree of embeddedness in external business relationships has also been found to influence the development of subsidiary roles (Andersson and Forsgren, 2000; Andersson et al., 2001). However, these studies have focused primarily on immediate business relationships and not dealt with the macro environment or possible differences between nations.

Less attention generally has been given to the external environment. Although the literature on

aggregate economic activity suggests that different roles do evolve, the strategic management literature, with a few exceptions (Mariotti and Piscitello, 2001; Birkinshaw and Hood, 2000), lacks research

relating subsidiary development to exogenous factors that are not firm, network and/or industry- specific.

The external environment can have considerable

impact on the scope and competence level of subsidiaries. This is often acknowledged in the literature under the rubric of location advantages. Considerable attention has been paid to the role of location advantages in determining the initial

entry decisions of MNEs in any given market (see e.g., Benito and Gripsrud, 1992; Culem, 1988; Davidson, 1980; Dunning, 1988; Jackson and Markowski, 1996; Lipsey and Kravis, 1982; Mudambi, 1995; Veugelers, 1991). However, once the decision to enter a given market through FDI is taken, the kinds of activity undertaken by the

subsidiary and its level of competence are also co- determined by the specific advantages of the host location. That is to say, while internal factors such as a firm's internationalization strategy, the role of the new location in its global portfolio of subsidiaries, and the motivation for investment are pivotal in the structure of MNE investment, these factors are dependent on the available

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location-specific resources that can be used for that purpose. Even if a host location does not have a large domestic market, for instance, an MNE may still engage in local production because of import restrictions. Likewise, weak protection of intellec- tual property rights may limit an MNE's involvement in R&D in a host location that would otherwise be an attractive location for R&D. The point here is that even at the initial investment stage, the scope of activities undertaken in a host location is tempered by that location's characteristics. These include all aspects of industrial and investment policy, which can determine the kinds of incentives provided by the host country, as well as more 'traditional' location advantages such as market size, agglomeration economies, infrastructure and asset availability.

The host country's location advantages play an important role in determining the level of competence of a subsidiary. This is on at least two levels. First, the level of competence is a function of the quality of location advantages that the host location can provide. High competence levels require specific complementary assets that are often associated with agglomeration effects, clusters and the presence of highly specialized skills. In other words, firms are constrained in their choice of location for high-competence subsidiaries by resource availability. For instance, R&D activities tend to be concentrated in a few locations because the appropriate specialized resources are associated specifically with those locations. Second, MNEs have been shown to prefer to engage in sequential investment in locations that provide sub-optimal returns but where they have prior experience. In part this is because firms are not boundlessly rational (see e.g., Madhok, 1997); but it is also because although the scope of activities undertaken by a subsidiary can be modified more or less instantly, developing competence levels takes time. MNE investments in high value-added activities (often associated with high competence levels) have the tendency to be 'sticky'. Such subsidiaries tend to be embedded with the local milieu with regard to linkages with suppliers, customers and domestic institutions. These linkages are both formal and informal, and will probably have taken years - if not decades - to create and sustain. Firms generally dislike radical change, and will prefer to maintain the status quo if it does not endanger their competitiveness. When an MNE does choose to exit, it must suffer the costs of entry in another location (in terms of effort, capital and time), and

these costs are substantial (Narula, 2002). Thus, where the level of competence of the subsidiary is high, the MNE is more likely to maintain it, even where an alternative location may provide a better fit with the firm's overall strategy.

Economic integration as an external determinant of subsidiary roles Regional integration schemes represent a specific subset of location advantages (Vernon, 1996). Regional integration has occurred on a de facto basis, due to economic convergence and an associated growing interdependence through trade and FDI amongst the Triad countries. In certain instances it has been further reinforced by de jure political and economic integration between groups of nations (Narula, 2003). This is best illustrated by the case of Europe, which has been in the throes of integration for half a century.

The static and dynamic gains from regional integration schemes result in both long and short run economic gains. This is due, among other things, to improved economies of scale and scope, increased efficiency through the rationalization and reallocation of firms' activities, and improved inter-regional linkages (Eden, 2001). Improvements in economic conditions can also be expected to positively influence inflows of FDI. In the context of the current article, we are interested in so-called deep integration schemes that may include common industrial policies, elimination of all intra-regional tariff and non-tariff barriers, and common external barriers. In other words, such schemes promote economic integration. Most prominent of these is the European Union initiative, which has evolved over time from a rather limited free trade agreement to a political and economic union (Baldwin, 1997). In contrast, shallow integration schemes essentially involve the reduction of tariff barriers between member countries. It is axiomatic that the benefits from membership of shallow agreements that have been in place for a short period are unlikely to prove as beneficial as deep integration agreements that have been implemented for a long period.

Our interest here is not in the process of regional integration per se, but in economic integration and what it represents in terms of its effect on other location advantages. Deep integration schemes such as the European Union influence the characteristics of locations through two means.

First, integration has an impact on market size, because MNEs have potential access to a larger single market. Numerous studies have looked at the


GRG Benito et al 445 445

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446

effects of EU integration on economic activity (Balasubramanyam and Greenaway, 1992; Chesnais and Sailleau, 2000). Although the positive trade effects of integration are transparent (Baldwin and Venables, 1995, Pain and Lansbury, 1997), the evidence of its impact on FDI is somewhat more ambiguous (Motta and Norman, 1996; Neven and Siotis, 1993; Yannopoulos, 1990). Dunning (1997a,b), in a comprehensive survey of inward FDI into the EU, concluded that the geographical and industrial distribution of inward FDI stocks had changed to reflect a certain level of rationalization, but that overall the spatial distribution of production activities had not undergone a major shift.

However, Dunning's survey - like many other economic studies - is based on macro-level data, which obfuscates the understanding of changes in the strategies of firms as a result of regional integration. MNEs have reorganized their spatial distribution within the EU to exploit economies of scale and scope, and to exploit more efficiently the comparative advantages of the various member countries within the EU. However, while the net effects may be zero, the importance of their operations may well have changed.

Take an automobile manufacturer with two hitherto independent subsidiaries, one in Spain and the other in Germany. In the interests of exploiting economies of scale, it may concentrate its body production operations in Spain, its engine manufacturing activities in Germany, and its R&D in Italy (where it hitherto had no activities). Thus, although there has been significant intra-EU redistribution of FDI, the net effect might simply be an increase in inward FDI in Italy, since the redistribution of resources between Germany and Spain may well cancel each other out. Such restructuring has been noted for a variety of firms across a wide spectrum of industries.

Such reorganization has also led to a certain level of disinvestment (Benito, 1997) or downgrading of activities in locations that have not joined the EU. Non-EU MNEs in particular, regarded the single European market initiative as the basis for the creation of a 'Fortress Europe' with high costs for firms not already established there (Almor and Hirsch, 1995), and reduced their investments in locations that were not part of the Union.

Second, deep regional integration can result in an increasing similarity in the economic structures of the participating countries. Common legislation and coordination occurs through the establishment of supra-regional institutions, resulting in a de facto

and de jure convergence of important variables such as tax rates, quality of infrastructure, competition law, incentive schemes, corporate governance, procurement regulations, etc. (Eliassen and Monsen, 2001).

Given the effects of regional integration on economic activities such as reorganization and rationalization, one might conclude that some changes in subsidiary roles are inevitable. Once an MNE rationalizes the number of subsidiaries or reorganizes the activities across borders, the various units are likely to experience changes in their scope and areas of responsibility. Increases in scope can typically be found when the number of subsidiaries is rationalized or when local conditions encourage localization of activities (Birkinshaw, 1996; Poynter and Rugman, 1982). Similarly, the scope may be narrowed to focus on specific activities and build expertise within selected areas (Surlemont, 1998; Chiesa, 1995). Hence, changes in scope are often related to both organizational and spatial considerations.

Scope does not necessarily always determine subsidiary roles, however. Some studies have found a correlation between a subsidiary's level of competence and its role within the MNE (Furu, 2001). Studies on 'centers of excellence', for instance, propose a strong relationship between the level of influence and the subsidiary's competence level (Forsgren and Pedersen, 1998; Fratocchi and Holm, 1998). This research also emphasizes the importance of using the subsidiary's competence in the MNE in order to develop new roles for it. High levels of competence in areas of importance to the MNE thus appear to result in greater subsidiary autonomy.

Consequently, it is useful to look at the combina- tion of scope and competence levels when discuss- ing subsidiary roles. As discussed previously, regional integration often brings about changes to both the organization and the performance of MNE activities. This can be seen in terms of changes in scope and in the development and use of competencies. Figure 1 illustrates the different subsidiary roles that unfold from the various combinations of scope and competence levels.

Because internationalization is inherently risky, everything else being equal, initial investments tend to be small, perhaps in a sales subsidiary or a small-scale production unit (Delany, 2000; Birkinshaw, 1998). Subsequent development may, if it occurs, proceed along one or both dimensions. As Figure 1 shows, subsidiaries with many activities


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but low competence levels are defined as 'miniature replicas' that basically mirror the parent organization. These subsidiaries will typically be found in areas that are strategic locations for the entire value chain in order to achieve economies of scale and scope. Subsidiaries with few activities but high levels of competence, on the other hand, are highly specialized units that add value to the rest of the MNE through their knowledge and competence. Such subsidiaries are often related to R&D activities. There will, without doubt, always be several different combinations between these two extremes creating a variety of roles, as illustrated by multi- activity units. In other words, there is a 'mid- ground' of subsidiary roles where probably the majority of subsidiaries can be placed. Also, 'Stra- tegic centers' represent subsidiaries with a wide scope of activities as well as high competence levels. Such centers commonly result from a process of rationalization and downgrading in locations outside the main areas of regional integration where the activities and core of competencies are united.

Regional integration, MNE subsidiaries and peripheral countries Deep regional integration has a considerable effect on the location advantages associated with peripheral countries. By peripheral countries we mean countries that are smaller economies relative to the core of larger countries that 'drive' and dominate the overall regional economic landscape. However, this article makes a further distinction between peripheral countries that are insiders (i.e., those that are full members of the scheme) and those that are 'outsiders'. We expect that it is generally more

beneficial - from the viewpoint of subsidiary development - to be located within a regional bloc than outside it. Regional integration promotes the widening of markets, and because 'insiders' have easier access to the larger market they are, all else being equal, in a better position than 'outsiders' to exploit economies of scale as well as economies of scope. The liberalization of trade and factor move- ments within an area should also increase the level of competition throughout the area. An intensification of competition should, in turn, lead to a shakeout of less-efficient actors; those that remain in an industry are likely to be the most competitive ones. Of course, competitive processes are never at a standstill. As a consequence, units operating within a bloc must continually strive to better their performance, efficiency or innovativeness. Stated differently: they have to become ever more compe- tent in their line of activities.

Units in 'outsider' locations may clearly also develop high levels of competence, especially if they are part of strong local industrial clusters or if they enjoy favorable access to unique resources of various kinds. Special circumstances may make particular locations well suited for certain activities, irrespective of the status of the host country in the context of specific regional integration processes. However, whenever operations are predominantly oriented towards the local market, factors such as weaker competition, smaller markets and more peripheral positions in the corporate network of the parent MNE, work against subsidiaries developing more advanced roles. Subsidiaries in 'outsider' locations with the characteristics of, say, 'strategic centers' are hence more likely to be the 'special case' rather than the 'general case'.

Countries on the periphery suffer (prior to integration) from smaller markets, and tend to have overcome the disadvantages of small market size by instituting industrial policies that promote import-substituting types of investment by MNEs. Thus, such locations tend to host subsidiaries that are miniature replicas. That is, the MNE is able to offset the disadvantages associated with small market size and inefficient scale economies, among other things, by opportunities associated with privileged access to restricted markets.

Upon membership of deep integration schemes, an insider peripheral country experiences a decline of its location advantages associated with such privileges, since the state must re-orient its economy to the supra-regional norms established by the core. This is assumed to be offset by an industrial


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redistribution within the region based on comparative advantage, and potential access to a larger unified market. 'Outsider' countries, on the other hand, experience a decline in their location advantages, not because of industrial redistribution, but by virtue of being marginalized relative to neighboring 'insider' countries.

This article compares Denmark, Finland and Norway as a basis for studying the effect of regional integration on subsidiary roles in peripheral countries. These three countries provide an ideal basis for our purposes. All three are part of the 'Nordic cluster' (Ronen and Shenkar, 1985). They have similar location advantages in terms of market size, income levels and labor costs (see Table 1), as well as demographics, politics and culture. In addition, by virtue of their size, location and history they are peripheral countries and have the limited location advantages associated with such countries. All three countries have historically had similar economic structures, dominated by small and medium sized enterprises and fostered by policies of import- substitution and welfare states, and have had a historical dependence on natural resources. Although Sweden shares some of these features, apart from having a population twice the size of the other Nordic countries, Sweden has had a significantly different economic history, engaging in industrialization much earlier. Its economy has a disproportionately high share of large MNEs (Oxelheim and Gartner, 1994).

This is not to imply that there are no differences in location advantages between the three countries under study vis-a-vis MNEs. As shown in Table 1, FDI activity in 1970 (measured in terms of FDI stock as a percentage of GDP) was much less significant in Norway and Finland than in Denmark, indicating that the location advantages of Denmark were superior to the other two countries as far as MNEs

Table 1 Basic information about Denmark, Finland, and Norway

Denmark

were concerned. It is worth noting, however, that the levels of FDI in the three countries were remarkably similar by 1999 (Table 1). This suggests, on an aggregate level at least, that both Norway and Finland have been relatively more successful at attracting FDI flows in recent years. As a result, there are no longer any major differences in location advantages, and there is no clear hierarchy among these countries. As we have emphasized earlier, however, aggregate data do not reveal the different kinds of subsidiaries, nor the nature of their activities.

The one location advantage in which these three countries differ is the issue of regional integration, where there is considerable variation. Denmark is a 'veteran' of European integration, having joined the European Community after a referendum in 1972, while Finland joined the EU in 1995. Norway remains an 'outsider'; it is associated to the EU through the European Economic Area (EEA, a shallow regional integration agreement between some non-EU European countries and the EU), having rejected EU membership twice (in 1972 and 1994) but remains unlikely to consider full membership. Their different statuses in the regional integration process that accelerated in Europe from the 1980s onwards - Norway, the 'outsider', vs Denmark and Finland, the 'insiders' - makes the case of FDI in these countries particularly well suited for such an investigation.2

Denmark and Finland have had to harmonize their policies and industrial structure as full members of the EU. By staying out of the EU, Norway has to some extent maintained its import- substituting policies, supporting and encouraging domestic industry through non-tariff barriers and subsidies in several industries. Incumbent MNE subsidiaries are given national treatment, provided they maintain a certain scope and competence in

Finland Norway

Population (million)a GNP per capita (PPP) in USDa FDI stock as percent of GDP, 1999b FDI stock as percent of GDP, 1970b Labor cost/h (nominal USD)c EU membership

5.3 23,800 24.2 5.9 23.0 Member since 1973

5.1 21,000 24.5 0.6 21.1 Member since 1995

4.5 25,100 25.1 1.6 22.7 Not a member

aCIA Fact book (2001). bCalculated as [FDIt/GDPt] x 100. World Investment Report (2000), Statistics Denmark, Bank of Denmark, Statistics Finland, Bank of Finland, Bank of Norway, Statistics Norway, Statistisk Arbok (1975 and 2000). CEconomist Intelligence Unit Country Reports (2001).


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their Norwegian activities (Nygaard and Dahlstrom, 1992; Kvinge and Narula, 2001). Its membership of the EEA has obliged it to dismantle some of its subsidies. Nonetheless, barriers to trade and investment are still on average at least double of those in most EU countries, and compared to countries such as Germany, UK and Italy more than three times as high (OECD, 2000). By being the only non-member of the EU in Northern Europe, Norway has thus moved from being on the periphery to being 'on the periphery of the periphery'.

These arguments lead to the following propositions:

P1: Foreign subsidiaries located in Denmark and Finland - countries that are members of the EU- are

likely to perform a wider range of value-adding activities than subsidiaries located in Norway, the 'outsider' country. P2: Subsidiaries located in Denmark and Finland - countries that are members of the EU - are likely to develop higher levels of competence than subsidiaries located in Norway, the 'outsider' country.

We recognize that other factors beyond membership of the EU may also influence subsidiary development, and we need to control for these. First, there are factors related to the characteristics of the host country. Most significant among these is the issue of industrial characteristics such as clusters. The presence of an agglomeration of industrial activities in a group of related industries can be an important location advantage that acts as a magnet to firms operating in similar industrial sectors (Benito, 2000; Birkinshaw and Hood, 2000). In addition, the resource-based sectors have tradition- ally been strong in the Nordic countries, attracting a significant share of inward FDI into these countries.

Second, home country characteristics could influence the competence and scope of subsidiary activities. Given the similarity of Nordic countries, the low psychic distance between them and the historical relationship between these countries, MNEs from Nordic countries are probably more likely to invest in other Nordic countries. However, precisely because the countries are geographically and culturally close, units are fairly easy to monitor and control, and the knowledge, competence and other resources required can easily be transferred from companies' HQs whenever needed. There may therefore be fewer incentives to assist or promote the development of units in other Nordic countries. Closeness may hence actually act as a barrier to subsidiary development. MNEs from other EU

countries may also show a similar tendency to invest in other EU countries, in preference to 'outsider' countries (Mariotti and Piscitello, 2001), but the relative closeness of EU locations may, again, impede subsidiary autonomy.

Third, we control for the nature of the subsidiary itself. Subsidiaries that have been established through new investment develop differently from those that have been established through acquisi- tions (Birkinshaw, 1998; Holm and Pedersen, 2000). In addition, there may be variation in subsidiary evolution that reflects differences in the age of subsidiaries and/or their size and involvement in export activities (Holm and Pedersen, 2000).

Method

Sampling and data collection The data for this study were collected in autumn 1997 as part of a major international research project looking into MNE subsidiary development (Holm and Pedersen, 2000). The general aim of the study was to investigate the heterogeneity of subsidiary roles and the drivers associated with the evolution of differentiated roles. Sampling procedures were designed to cover all substantial MNE activity in the three countries. In Denmark, the Greens directory was used to select companies. In Finland and in Norway, companies were chosen from the Dun & Bradstreet database. Only foreign- owned companies with ongoing operations of some significance were selected.3 The initial sample sizes were 750, 1159 and 656, in Denmark, Norway and Finland, respectively. The main research instru- ment in the study was a detailed mail questionnaire developed by the team of researchers. Respondents were either subsidiary executive officers (70-80% of the cases) or other top-level managers such as vice presidents, financial directors or marketing execu- tives. The survey, including two follow-up enquiries to non-respondents, resulted in a total of 809 replies distributed across the three countries as shown in Table 2. This gives an overall response rate

Table 2 Sample characteristics

Number of cases

(a) Total number of cases Denmark Finland

Norway (b) Cases with missing data

(c) Final sample

809 310 238 261

81 728

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of 31.5%. However, due to missing data on some variables the final sample actually used in our analysis consists of 728 cases.

Measurement and descriptive statistics This study examines whether being a EU member has had any impact on the operations of MNEs in the Nordic countries. The focus is on heterogeneity of subsidiaries' activities and roles. Based on previous literature on the topic, we deal specifically with two dimensions of subsidiary development: (i) the scope of activities undertaken by a given subsidiary (SCOPE) and (ii) the competence of a subsidiary in performing a specific task or activity (LEVEL). The two dependent variables were oper- ationalized as follows:

SCOPE = E ai

where ai=any given activity i (research, development, production of goods or services, marketing/ sales, logistics/distribution, purchasing, human resource management) undertaken by a given foreign-owned unit. Since it takes a value of 1 if an activity is performed, and 0 otherwise, the variable simply sums up the number of activities. Hence, values for SCOPE range from 1 (i.e., a single- activity unit) to 7 (i.e., the whole range of tasks are carried out).

LEVEL = ci/ ai

where ci is a measure of the level of competence of the foreign-owned subsidiary in performing a given activity i, as perceived by the respondent on a 7- point scale (l=weak competence, 7=very strong competence). Since the level of competence indi- cator ci is counted only for activities ai actually undertaken by a given unit, it provides a measure of the average overall level of competence of that subsidiary.

The focal independent variable of this study is the EU membership status of the host country. It is measured by a dummy variable (EU-MEMBER), taking the value of 0 for subsidiaries in Norway and 1 for subsidiaries in Denmark and Finland. We hypothesize a positive effect of EU membership on subsidiary development, and we therefore expect a positive sign for this variable.

As noted earlier in the article, subsidiary development may depend on several factors other than regional integration processes, and in this study we control for additional factors covering a variety of characteristics of the host countries, the home

countries of the MNEs, and the subsidiaries them- selves. Our controls are as follows:

CLUSTER=1 if a subsidiary operates in an industry with cluster characteristics, and 0 otherwise. See Appendix for a classification of industries.

RESOURCE 1 if a subsidiary operates in a resource-based industry, and 0 otherwise. The following industries were classified as resource- based: agriculture, forestry, and fishing (ISIC 11- 13, 3114, 3122), coal, petroleum and gas, metal ore mining and other mining industries (ISIC 21-29), manufacture of lumber (ISIC 3311), manufacture of pulp and paper (ISIC 3410-3419), manufacture of basic metals (ISIC 37), electricity, gas, steam and water supply (ISIC 41, 42).

NORDIC-PARENT 1 if the parent MNE is based in another Nordic country (Denmark, Finland, Iceland, Norway and Sweden), and 0 otherwise. Similarly, EU-PARENT=1 if the parent MNE is based in a EU member country, and 0 otherwise.

ACQUISITION-1 if the mode of entry of the current parent was through a takeover, and 0 if the subsidiary was established as a greenfield operation. YEARS counts the number of years elapsed since the subsidiary was established or acquired by its current parent. SIZE is measured as the number of people working in the subsidiary in 1996. Even though alternative measures of size exist, such as sales or production volumes, we chose to use number of employees because it gives a far more stable basis for comparisons across countries and industries. Finally, we control for the extent to which subsidiaries operated beyond the local market in 1996 by the variable EXPORT that measures the export ratio of a unit (i.e., the percentage of exports as a share of total sales) in that year.

The required information on home-country and subsidiary-level variables was taken from the survey. More descriptive statistics are given in Table 3. The correlation matrix (Table 4) indicates that multicollinearity should not be a problem in the data set. Further tests of potentially harmful multicollinearity - the variance inflation factors (VIF), and the Belsley-Kuh-Welsch diagnostic (Belsley et al., 1980) - also failed to detect any indications of multicollinearity.

Results As an initial test of the propositions we conducted an ANOVA to check whether there were any differences between the national sub-samples with regard to the mean values of the two dependent variables of the study. Based on our previous


. r Fnv.;irnm -nta-l ;n.fl-..,nte Ann MNF c.hkri;;iaurv rrlA (rD.~ R1rn;it Pt nl

Environmental influences on MNE subsidiary roles GRG Benito et al

Table 3 Descriptive statistics (n=728)

Variables Description

Dependent variables

Host country

Home country

Subsidiary

SCOPE LEVEL EU-MEMBER CLUSTER RESOURCE EU-PARENT NORDIC-PARENT ACQUISITION YEARS SIZE EXPORT

Number of activities

Competence level Host country is EU member Cluster industry Resource-based industry Parent based in EU country Parent is Nordic

Entry by acquisition Years since entry Number of employees Export ratio

4.8 (1.6) 5.4 (1.0)

15.2 (17.0) 217.0 (692.4)

22.3 (32.5)

1:67.7%, 0:32.3% 1:19.2%, 0:80.8%

1:5.4%, 0:94.6% 1:68.6%, 0:31.4% 1:39.6%, 0:60.4% 1:60.1%, 0:39.9%

Table 4 Correlations between independent variables (Spearman's Rho)

Variables

1. EU-MEMBER 2. CLUSTER 3. RESOURCE 4. EU-PARENT 5. NORDIC-PARENT 6. ACQUISITION 7. YEARS 8. SIZE 9. EXPORT

0.101 -0.058 -0.057 -0.096 0.154

-0.032 0.286 0.278

2

0.138 -0.029 -0.111 0.037

-0.046 0.125 0.130

3

0.022 0.052 0.017

-0.034 -0.029 0.151

discussion, for both SCOPE and LEVEL we expected to find distinct differences between subsidiaries in

Norway on the one hand and subsidiaries in Denmark and Finland on the other. Formally, our

empirical hypotheses are N I D F H 1: c SCOPOPE < SCOPESCOPE

N I D F H2: LEVEL<LEVEL < L EVELLEVEL

where superscripts N, D and F denote Norway, Denmark and Finland respectively.

The results of the analysis, which are shown in Table 5, turned out to be in agreement with

expectations. For both SCOPE and LEVEL, the mean values for the Norwegian sample are significantly lower than for the Danish and Finnish

samples. The difference is particularly pronounced for the SCOPE variable. It is worth noting that no

significant differences in mean values were found between the Danish and Finnish samples, which

supports the hypothesis that differences can be attributed to the EU-membership status of the countries rather than being due to some other national effect.

Table 5 Analysis of variance for SCOPE and LEVEL

Countries Mean scores of variables

SCOPE

(a) Denmark

(b) Finland

(c) Norway Average values F-statistic

5.0484c 4.9328c 4.4904a,b

4.8344 8.979 (P<0.01)

LEVEL

5.5361 5.4873c 5.2519a,b

5.3719 5.638 (P<0.01)

Note: Superscripts a, b, and c, indicate whether differences in the mean scores for subsidiaries in a given country deviate significantly (at the 0.05 level) from the other countries.

Even though the ANOVA results lend support to our

propositions, they must be regarded as preliminary. We cannot firmly conclude that such differences are associated with countries' EU membership status, since the analyses are bivariate and we did not control for other possible reasons for why systematic differences may exist between subsidiaries located in different countries. In order to

investigate the possible influence of other factors, a series of regression analyses was conducted

journal of International Business Studies

451

Mean (s.d.) Distribution

7 8 4

0.351 0.008 0.029

-0.055 -0.029

5

-0.055 0.029

-0.105 0.087

6

-0.455 0.270 0.329

0.000 -0.110 0.349

I

1


introducing the selected control variables. The regression models have the following general form:

Yi = Xi + pi EU-MEMBER + iy Z + ei,

where Z is the vector of control variables, a, /f and y are regression coefficients, and e denotes the error term. In accordance with P1 and P2 we expect that Pi > 0. The results from a total of four ordinary least square regression analyses for the complete sample are presented in Table 6. The first two columns present results of the models using SCOPE as the dependent variable, while the last two columns provide the regression results for the LEVEL variable. Specifically, columns 1 and 3 present the results for a 'reduced' model with the EU-MEMBER dummy as the only predictor, while columns 2 and 4 present the regression results for the 'full' model.

As can be seen from Table 6, the coefficients for EU-MEMBER - our dummy indicating whether or not a subsidiary was located in a EU member country - are consistently positive and significant in all regressions. Hence, even when other factors are controlled for, there remains a strong associa- tion between the EU membership status of a Nordic country and the development of foreign-owned subsidiaries in those countries. We conclude that support is found for both of our propositions.

It turns out that the regressions perform far better when modelling the SCOPE dimension of subsidiary heterogeneity. Model 2, which includes all our

Table 6 Regression results, complete sample, OLS-estimation (n=728)

Variables

SCOPE (number of activities)

control variables in addition to the EU-MEMBER dummy, attains an adjusted R2 value of 0.20, which is quite satisfactory given the complexity of the phenomenon studied and the heterogeneity of the sample.4In contrast, the 'full' regression model 4, for the LEVEL variable, only explains 3% of the variation in that dependent variable. Turning to the control variables, it is noteworthy that the results for subsidiary level variables (ACQUISITION, YEARS, SIZE and EXPORT) are generally stronger than those for industry characteristics (CLUSTER, RESOURCE) or the home region of the MNEs (EU-PARENT, NORDIC-PARENT), and particularly so for the regressions with SCOPE as the dependent variable. The most consistent result is found for the YEARS variable - the age of the subsidiary - which is

positive (at significance level P<0.01) in both regressions of the 'full' model. This indicates that subsidiary development takes time, which is not surprising given the complexity of such processes, especially with regard to competence development. Regressions models 2 and 4 include a dummy variable, EU-PARENT, capturing whether or not the parent MNEs are EU-based. The coefficient for this dummy was insignificant in both regressions, which indicates that the origin of the parent company does not per se explain role differentiation in Nordic subsidiaries in terms of the number of activities performed by the subsidiaries or their level of competence. However, the effects of various factors in explaining role differentiation could well

Dependent variable

LEVEL (competence level)

Standardized coefficients (t-values)

Model 3


0.145 (4.157)*** 0.065 (1.913)** 0.016 (0.475)

-0.030 (-0.890) 0.033 (0.927) 0.106 (2.957)*** 0.225 (5.937)*** 0.102 (2.806)*** 0.100 (2.953)*** 0.318 (8.812)***

0.117 (3.314)*** 0.140 (3.679)*** -0.046 (-1.216) -0.013 (-335) -0.033 (-0.829) -0.018 (-0.454) 0.046 (1.086) 0.105 (2.597)*** 0.015 (0.414)

-0.078 (-1.960)**

Model statistics F=1 7.284***

Adjusted R2=0.02

Notes: *P<0.10, **P<0.05, ***P<0.01.

F=21.507*** Adjusted R2=0.20

F=10.982***

Adjusted R2-0.01 F=3.184***

Adjusted R2=0.03


452 GRG Benito et al

Model 1 Model 2 Model 4

-.. - ---- p

I

453 Environmental influences on MNE subsidiary roles GRG Benito et al

Table 7 Regression results, split samples, OLS-estimation

Variables Dependent variable

SCOPE (number of activities) LEVEL (competence level)

Standardized coefficients (t-values)

Model 5: EU parents Model 6: non-EU parents Model 7: EU parents Model 8: non-EU parents


Model statistics

0.127 (2.950)*** 0.016 (0.377)

-0.014 (-0.341)

0.128 (3.041)*** 0.209 (4.539)*** 0.076 (1.725)* 0.095 (2.284)** 0.266 (5.872)***

n=498 F=14.123***

Adjusted R2=0.17

-0.038 (-0.629) 0.039 (0.653)

-0.075 (-1.230)

0.056 (0.937) 0.255 (3.732)*** 0.147 (2.239)** 0.115 (1.956)** 0.407 (6.580)***

n=230 F= 10.870***

Adjusted R2=0.26

0.133 (2.825)** -0.049 (-1.061) -0.004 (-0.092)

-0.023 (-0.501) 0.037 (0.736) 0.118 (2.435)** 0.023 (0.496)

-0.053 (1.085)

n=498 F=2.409**

Adjusted R2=0.02

0.140 (2.019)** -0.044 (-0.638) -0.030 (-0.432)

0.006 (0.093) 0.062 (0.783) 0.076 (1.005) 0.010 (0.142)

-0.131 (-1.830)*

n=230 F=1.172

Adjusted R2=0.01

Notes: *P,0.10, **P<0.05, ***P<0.01.

differ depending on parent companies' region-of- origin. In order to investigate further possible differences between EU and non-EU-based MNEs, additional regressions were run with the sample split into two subsets (see Table 7, models 5-8). The split sample results largely emulate the results for the full sample.5

Discussion In this article, we have attempted to identify the effect of environmental factors on subsidiary roles. Although we have illustrated our arguments by focusing on European integration, this represents a proxy for differences in economic structure and industrial policies, which are prime environmental factors determining the scope and competence of an operation. The growing literature on subsidiary roles has mainly focused on issues internal to the MNE, without connecting this to the external environment other than through firm, network or industry-specific factors. Even though issues of external embeddedness have emerged from such studies, these are still directly linked to immediate business relationships and do not consider national differences or changes in macro level policies (Holm and Pedersen, 2000).

Using data on subsidiaries in the Nordic countries, we have tested the possible effects of environmental factors on both the scope and the competence levels of subsidiaries. Our analyses -

in which we control for a range of additional factors - support both propositions. The results show that membership of a deep integration scheme such as the EU, because it requires economic convergence, the establishment of common institutions and synchronized policy frameworks, plays a significant effect in determining differences in both scope and competence levels. We have controlled for a variety of other factors, including national differences, by selecting countries that are otherwise similar. Furthermore, we have controlled for industry effects, such as the presence of clusters, and other important variables such as nationality of the parent companies. The results suggest that more developed roles can be expected for subsidiaries located within the EU area than for subsidiaries located outside it. It is worth noting that the model evaluating competence levels has significantly lower explanatory power than the equivalent model evaluating scope. This suggests that the factors influencing competence levels are not adequately captured in the model.6 It may also reflect the considerable heterogeneity of firms' strategies, and the fact that the organization of their EU-based activities may reflect just part of their overall global strategies. However, it is evident that regional integration is only one of several issues relating to the external environment and influencing subsidiary roles and competence. Long- itudinal data on the subsidiary networks of MNEs


* 454LIIVlIIIIICIILaI IIIIlUCIIccc Vo V111 1U~IMIGII S UU CIL CTL U

454

would be very helpful in order to explore these issues further.

Given the considerable reliance of new and prospective (and largely peripheral) EU members on FDI as a source of capital and technology, our results have considerable policy implications. It is well acknowledged that the net benefits from FDI vary in line with the kinds of activities undertaken in a given location, and that different subsidiaries may have widely different roles, ranging from relatively simple distribution tasks to responsibility for a range of activities, including research, development and manufacturing.

Participation in regional integration agreements is a mixed blessing, insofar as improving the extent and intensity of MNE subsidiary activity is concerned. On the one hand, it implies a possible advantage, in that participants in regional integration are better able to attract and retain foreign- owned subsidiaries than are non-participants. Hence, MNE activity and subsidiary development is more likely to take place within member countries. The increased market competitiveness and value-added activity associated with such activity, in turn, may have wider effects within the host country. On the other hand, however, increased competition due to regional integration may have adverse effects for MNE subsidiaries, since not all firms will survive the effects of increased competition (Benito, 1997).

Furthermore, our study has focused on peripheral countries, both within and outside the EU. This study confirms that there are substantial benefits to be gained from being in the 'core' rather than the periphery, whether in the absolute sense of being peripheral to the EU as a unit (e.g., Norway), or the relative sense of being economically marginal in comparison to the core players (e.g., Denmark and Finland compared to Germany and UK). In other words, while countries such as Denmark and Fin- land derive certain benefits relative to current EU- outsiders such as Norway, Switzerland and the accession countries, both sets of countries are at a disadvantage relative to the core members of the EU. One limitation of the current study is that we only have data for a single period. It may well be that - except in sectors where there are important and dynamic industrial clusters - small, geographically peripheral countries that are within the EU may also experience a decline in MNE subsidiary activity both in terms of scope and competence levels over time. In seeking EU-wide rationalization (through economies of scale and lower transporta-

tion costs, among other things), MNE activities that prior to EU membership were conducted locally may eventually be relocated to larger, more central countries in the long run, as these peripheral markets are too remote and local market size too small to justify such subsidiaries.

Acknowledgements Previous versions were presented at the Nordic Work- shop in International Business, Idoborg, Sweden, May 2001; the Academy of International Business Annual Conference, Sydney, Australia, November 2001; and the European International Business Academy Annual Conference, Paris, France, December 2001. We thank participants at these meetings, Tore Abrahamsen, Trond Vahl, and the three anonymous reviewers for their comments. Research funding was provided by the Research Council of Norway (project 1 39982/510 'Globalization and Internationalization of the Norwe- gian Economy').

Notes 'Research on firm-level issues has concentrated

primarily within two streams, focusing on particular locations or kinds of activities. The first body of literature is associated with the effects of integration on the location of R&D activities (e.g., Mariani, 1999; Pearce, 1999; Gerybadze and Reger, 1999). The second is associated with economic geography, focusing on the interaction between MNEs and location but with an emphasis on macro-organizational and policy issues. See Dicken (1998) for an overview.

2lncluding another small and peripheral 'EU outsider' country alongside Norway would have provided an even stronger research design; Switzerland is an obvious, albeit not ideal, case. Unfortunately, we do not have comparable data on foreign subsidiaries in Switzerland or in other small European states that remain outside the EU.

3The cut-off criteria used in the various countries were very similar. In Denmark, only companies with at least 20 employees were chosen. In Norway, only companies with sales of 10 million NOK or more were selected. In Finland, the cut-off points were either a yearly turnover of 5 million FIM or at least 20 employees.

41n order to check the robustness of results, an ordinal regression was also conducted with SCOPE as dependent variable (SCOPE has a range of 1-7, and can be considered as a polytomous ordinal response variable). The results for both the reduced and the full models are very similar to those obtained for the OLS regressions. The reduced model attained a pseudo-R2 (Nagelkerke) of 0.02 with the coefficient of


Fn..lr.nm ,nt-l Infl:l.n.-c nn MNF c,.hctlla.rv rn.Ic C.PC. Rpnitnr ot n

455

EU-MEMBER significant at P<0.01. The full model

produced a pseudo-R2 (Nagelkerke) of 0.25 with the same set of coefficients being significant as those for the OLS regression in model 2 (i.e., EU-MEMBER, NORDIC-PARENT, ACQUISITION, YEARS, SIZE, and EXPORT). We thank an anonymous reviewer for

suggesting this robustness check. 5The only noteworthy exception is the SCOPE-

regression for the sub-sample consisting of MNEs from outside the EU (model 6), where the coefficient for EU-MEMBER is not significant. Hence, in contrast to EU-based MNEs (whose subsidiaries in Norway are likely to conduct fewer activities than their

counterparts in Denmark and Finland), for subsidiaries of non-EU-based MNEs, it does not matter for

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Appendix Classification of cluster industries in the Nordic countries, see Table Al.

Table A1

Country Cluster

Denmark IT and telecommunication Healthcare

Energy/environment Functional foods Furniture and design Professional services Construction

Finland IT and telecommunication Healthcare

Energy/environment Food industry Forestry, wood and paper Ship building Engineering services Metals

Norway IT and telecommunication Healthcare Oil and gas, energy

Fishery Furniture and wood products Shipping Stones and metals Light metals

ISIC codes

3830-39,7202

3522,9330 4100-99 3100-99 3321-22 7202 3513,3522,5012

3832,8323

3522 4100-99 3121 1200-99,3300-99,3400-99

3841 8324 3811-19

3832,7123,7202,8323

3850-59 2200-99,3821,4100-99,

4200-99,5023,7115 1300-99,3114,3122 3311,3321

3841,7120 2900-99 3720-29

Source: Konkurransekraft i Norden, Nordisk Ministerrad, Copenhagen: TemaNord 2000: 537.

Accepted by Tom Brewer, outgoing Editor, 14 January 2003.


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Documents

Environmental Influences on MNE Subsidiary Roles: Economic Integration and the Nordic Countries